Have you changed jobs and worry about your FHA eligibility? Do you think you need 2-years of employment before applying for an FHA loan? You aren’t alone. But, you may be in luck. The FHA has flexible guidelines when it comes to your job. They want consistency and reliability. You can demonstrate this in several ways. It may not mean staying at the same job for 2 years. We describe how below.
The Importance of the 2-Year Employment History
No matter your story, you should have a 2-year employment history. This doesn’t mean at the same job. Lenders want to see that you have worked over the last few years. This doesn’t mean you can’t have a gap in employment during that time either.
For example, you could have a history of graduating college and working at the same job for the last 2 years. Maybe you had a part-time job and now you work full-time. You could even have gone from salary to commission within that time. Lenders prefer to see you working. Without at least 2 years of this, they can’t predict your future habits.
Changing Jobs May be Acceptable
Do you worry about changing jobs? Don’t get stuck in a dead-end job until you close on your loan. The FHA allows job changes. You just need to follow the rules. Usually, more than 3 job changes within a year throws a red flag. If this is you, consider the following:
- You must show proof of training or education that warranted the job changes. In other words, the FHA wants a reason for the changes. Just switching jobs because you felt like it won’t help your case.
- Your new jobs must show some type of benefit. Higher pay is a no-brainer. But, it’s not the only benefit. Room for advancement or better fringe benefits are also valid reasons.
Keep in mind, your credit risk combines your credit score and employment history. In other words, frequent job changes and a low credit score isn’t good. Many lenders won’t approve this situation. Frequent job changes usually require a high credit score. This shows lenders you can handle the job changes. It also shows you have a low risk of defaulting on your financial responsibilities.
Gaps in Employment May be Acceptable
Even gaps in your employment may be acceptable. Again, you need the right circumstances. A 1-year break from work and a low credit score aren’t a good combination. First, let’s look at how you can use a gap in your work history to your advantage.
- If you left work for more than 6 months, you must wait until you are back at it for 6 months before applying for an FHA loan.
- You must have a 2-year employment history before the break. If you don’t have a 2-year history, the lender doesn’t have anything to measure your consistency in the workforce.
What if your gap in employment was less than 6 months? You are at the lender’s discretion. According to the FHA, a non-extended absence is acceptable. The FHA doesn’t fund the loans, though. The lender has the final say. As long as they follow FHA rules, they can add their own expectations. Most lenders deal with it on a case-by-case basis, though.
Hourly Employee Requirements
Hourly employees pose a different risk. First, the lender considers whether your hours are variable or consistent. Employees with consistent hours have the easiest time qualifying. A one-year work history may suffice. The lender will calculate your income based on your standard hours and pay rate.
Employees with variable hours, on the other hand, need a 2-year history. The FHA requires lenders to calculate a 2-year average. This accounts for the peaks and valleys hourly employees often experience. This is evident in borrowers working in retail. They often have more hours during the holiday times and less during slow times. Rather than qualifying them during either period, the lender uses a 2-year average.
If you received a pay raise within the last year, though, the lender may use the 12-month history. First, you must prove the pay raise. The lender can then decide if they should use the higher income. You can prove the raise with a Verification of Employment and your paystubs over the last 12 months.
Part-Time Employee Requirements
Part-time employees pose a special risk. The FHA doesn’t have any exceptions to the 2-year employment rule here. You must prove a 2-year history for consistency purposes. Part-time work is often riskier. There’s no guarantee of continuance. Working for the last 2 years without a gap will help ease a lender’s mind.
Self-Employed Borrower Requirements
Working for yourself is a great way to get ahead today. It does pose a risk to a lender, though. The FHA requires at least a 1-year history before using self-employment income. You must also show a history in the industry. For example, if you open your own car wash business, you need experience in the industry. Maybe a few years back you managed a car wash or you worked in the office handling the books. Lenders want to know you have an understanding of the business. This helps enhance your chance of success.
If you don’t have a long history in the industry, make sure you have proper training/education. Maybe you went back to school to open your own business. Some people take on a partner with experience in the industry. Think of compensating factors that make your ability to succeed in the business seem likely.
The Bottom Line
The FHA offers flexible employment guidelines. Don’t think if you changed jobs you must wait 2 years. That’s the old school way of thinking. Today, as long as you can document everything, you have a better chance of approval. Of course, consistency is the key. Working at the same job for 5 years looks better than having 3 jobs over the last 12 months.
No matter your employment history, look at the rest of your qualifying factors. Having a low credit score or high debt ratio won’t help your case. Make your loan file look as attractive as possible and the lender may put less emphasis on where you worked last year.